Since the 2008 meltdown there have been a lot of people who have sold out of the markets (equities) in favour of Bonds (Governments debts or the debts of corporations).
Depending on when you did this it may have been a great move by limiting your losses during the downturn or a very bad move, locking in your losses at the bottom of the markets and missing out on the gains in the following years. Regardless we are not going to dwell on the past. What’s done is done.
When you hold a fixed income investment (a Government bond) that you feel is safe and secure it may be very harmful to your financial future in 2012 and beyond. The reason is that we are currently in a very low interest rate environment, meaning that interest rates cannot go down a lot further than they are now. Over time interest rates will have to increase to a healthy level for the economy. As this happens investors who are holding bond portfolios stand to lose the most.
As interest rates increase bond portfolio returns decreases in value. To explain this, think about it this way. If you hold a bond that pays out 3% per year and the going interest rates increase to 4% someone looking to purchase a bond now has a choice. They can purchase your bond that you bought for $1000 and get 3% per year, or buy a new Government Bond for the same $1000 and get 4% per year. The choice for them is simple, pay the same amount for the higher 4% per year. This means that your bond is no longer worth $1000 after the interest rate increase. In this case, your bond would be worth roughly $907. Quite a loss for a ‘safe’ investment.
In summary, your safe and secure investment may be quite the opposite going forward. This is why you need to have a professional watch over you and your money to be sure you are positioned correctly to take advantage of swings in the market.
I’d love to help. If you have any questions, do not hesitate to call Travis at 604-308-6030.
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